Within the United States' income tax system, a tax deduction,
or "tax-deductible expense", is an item which is subtracted from
gross income in order to arrive at the taxable income.
Effectively, the taxpayer pays no income tax on the amount of money he spent on tax-deductible expenses. For example, if an individual earns $50,000 in a year and gives $5,000 to tax-deductible charities, he will end up paying income tax as though he had earned only $45,000 that year.
In this way, the federal and state governments encourage certain types of
spending. Proponents of the tax deduction system believe that it
has encouraged charitable contributions, home ownership, and education
in the United States, and that these benefits would be lost if the
United States were to move to a flat tax system featuring no tax
There are many types of deductions. The number and complexity
of the amendments has often led to a call for tax reform, to simplify
the tax code, at the very least.
Common examples of tax deductions for individuals follow. Each of these deductions may or may not be appropriate, given a taxpayer's filing status, income, and so forth.
- an exemption amount for the taxpayer, their spouse, each child,
and any other qualified dependents;
- Mortgage interest paid on one's primary residence;
- Charitable contributions;
- Business expenses (including travel, meals, and the so-called
three-martini lunch; (meals and entertainment are generally only
- Union and professional dues;
- Medical expenses above a certain percentage of the individual's total income;
- The cost of tax advice, software, and books;
- Work uniforms and clothing, including, e.g., safety goggles, steel-toed shoes;
- Moving expenses;
- Casualty (fire, theft) losses;
- Educational expense (but only if it does not prepare you for a new career);
- The oil-depletion allowance;
- State and local taxes;
- Capital losses, such as from the sale of stock that has lost value, that exceeds the taxpayer's capital gains in that year, up to $3,000;
- Gambling losses (but not in excess of gambling winnings).
All tax deductions allowed by the federal government are also allowed by all the state governments. Each state government may allow additional types of expenditures to be tax-deductible.
Tax deductions start to "phase out" for individuals with an income of about $130,000 or higher, and the full amount of the expenses cannot be deducted.
Corporations enjoy a wider range of possible tax deductions, as they are taxed
on their income, and in order to calculate a corporation's income,
the corporation simply subtracts its expenses from its revenues.
Hence, all expenses of the business -- if the expenses
can be demonstrated to have been made for business purposes -- are
Comedian Al Franken once did a skit on Saturday Night Live in
which he purported to demonstrate the creative use of tax deductions.
Among other things, Franken held up a picture of himself on vacation
in Hawaii. Since he used the photo in the comedy routine in his
professional capacity as a comedian, the entire cost of his trip
was (allegedly) deductible. Whether Franken actually took such a
deduction, or whether he got away with it, is unknown.